March 10, 2009

Colorado is calling Jim Cramer: Pikes Peak Market Update, March, 2009

Jim Cramer made a wild announcement in October of 2007. Appearing on The Today Show, with the stock market roaring into record territory, he commented on something that was not his specialty - by a long shot: The Residential Real Estate Market. "Don't buy a house anywhere... especially Colorado!" He roared, repeating what he had said the night before on Mad Money.

Funny he should say this as our market was already in the 18th month of a down market and his own specialty, the stock market, was days away from beginning a 50% decline in value.

It's a great example of how difficult it is to specialize and how easy it is to sensationalize. In the same conversation, Cramer predicted a real estate market recovery in June of 2008. Wow. Which was more wrong?

So there is a certain satisfaction to be had in Jon Stewart's "evisceration" of Mr. Cramer and his CNBC colleagues on a now nightly basis on the Daily Show. (For those wondering why this link takes you to the video on the Huffington Post, the Comedy Central link has trailers for a borderline movie before hand, and well, The HuffPost link is a little more family friendly. Barely. You've been warned.)

Running numbers and predicting outcomes is stinking hard. Predicting accurately what will happen in such an inter-connected marketplace, where tiny residential real estate is effected by global trade, percentage of Treasuries held by Chinese investments, a foreclosure next door and stinky pink carpet that reeks of a cat two owners ago... that's hard. Jim has a tough job. He must be bombastic and sensational and accurate. Poor Guy. But he should also be a little smarter than to mouth off about a market 2000 miles away from this about which he knows precious little. Some smarties who run elaborate risk assessments, guys at places like PMI and The Office of Federal Housing Oversight have never placed a dagger in Colorado, and right now are as bullish on Colorado as any other state in the US, essentially saying the correction is just about done.

But there is some pride in the fact that having run numbers for close to three years on 15 MLS areas and the overall Pikes Peak Market in general, I have gained a little bit on both my credibility and my accuracy.

1.) I predicted 8200 single family sales last year. We ended up at 8339.2.) I predicted the lowest number of listings since 2002. That was true.3.) I did not guess that the declining market index would have such an impact on 2008 sales, but after that first started to gain traction in February, 2008, I monitored the trend and then predicted it would abate by fall. Despite a dramatic slow down in activity, PMI and www.ofheo.gov agreed in their 3rd Quarter, 2008 report.

I also knew that January, 2009 sales data would be spectacularly bad, primarily because I monitor consumer behavior. For some reason, The National Association of REALTORS seems to spend a great deal of time monitoring macro models and trends, rather than asking easier to understand micro questions, questions that organizations like REAL Trends seem to be better at asking. Case in point: if people aren't buying Christmas presents, why on earth will they buy houses? NAR essentially predicted an instant injection of buyers with the December rate plummet. Instead, the worst month in 14 years materialized, locally. Yet there was ample evidence that something was in fact starting to happen.

It showed up a little bit in February (CLICK HERE FOR THE MARCH STAT PACK OF PIKE'S PEAK REGIONAL REAL ESTATE NUMBERS). Sales increased 22% over the January freefall. Price went up $10,000, to a still extremely low $207,000, but nonetheless, recovered some of the huge January losses. What is most amazing though is how inventory continues to hover around 5000 units and not climb. For every price point below $400,000, supply actually went down at the end of February compared to the end of January. This is unheard of. The months of inventory went down (indicating demand went up in relation to supply) for every price-point under $175,000 (a range commonly associated with local first-time buyers).

Without getting too "experty" here is the real-simple on the activity that is afoot:1.) First Time Buyers, a sustainable demographic, are out in force. By the end of this month, it will be a seller's market under $175,000 as all months of inventory will likely shrink below 6 months. It will do this with 5 prime buying months still to come. 2.) The Tax Credit is helping a little bit, but the even more sustainable force of low prices is drawing buyers into the market. This actually starts to unlock some of the puzzle: it is price, stupid. The best price, sells. I had a buyer lose out on a VA REPO last week: the original owners had paid $208,000 and it debuted at $151,900. Despite going over asking price, his offer was only one of 7 offers. What is a compelling reason to buy? $25,000 on the table. Luckily my buyer found that Sunday, strangely enough on a home that was paid off. 3.) The move-up market of $175,000 to $300,000 is still languishing. This will begin to move when the under $175,000 market either a.) chooses to buy up or b.) any relocation begins. The latter is beginning, and while the Army will be here in droves, they will only make up for the deficiencies of other industries, a slow Air Force relo season (if relocating Air Force personnel are sellers in other markets, they almost assuredly will rent that home and rent here) and the slow down among non-first-time buyers here. 4.) The move-up market accounts for 35% of the entire listed inventory. Even if the market below $175,000 is poised for "recovery" it will take at least 18 months for this next segment to reap the benefit and possibly longer.5.) Only when the "move-up" market recovers does the high end even start to move. Stat of Stats for the month: 31 total sales over $500,000 year to date as of today. This time last year: 51. In 2006: 100.

Numbers that really matter:

There are fewer listings now than this time TWO YEARS ago.

Interest Rates are a full percent lower than they were this time last year.

There are cool programs like www.HOMEPATH.com that can get primary residents into Fannie Mae Repos with only 3% down and no appraisal or MI on a 30-year fixed Conventional Mortgage. Investors can be these homes with only 10% down, and still no appraisal or MI.

There are typically 4 to 5 dozen homes listed at www.MCBREO.com, the HUD/FHA repo site. A primary resident who pays full HUD-asking price (usually 3 to 12% below market to begin with) can utilize FHA financing with only a $100 downpayment (instead of 3.5%).

There will be no lightning bolt recovery. We are not poised to spin right out of this funk because we're so much better off than the rest of the nation. It takes longer to close a Fannie/Freddie loan than FHA in many cases. There is a multiple year supply of inventory over $400,000. This is going to take some time.

But what is promising: there is a three-year pent-up demand for housing among people shut out of the real estate boom, those who have matured into homeownership, and those that have continued to relocate to Colorado Springs (number one per capita destination for U-Haul Trailers in the US! Yippee!). First-time buyers are a sustainable demographic to build a marketplace upon. They have basic shelter needs. They enter into basic budgeting and accounting. They mature as citizens. This is not the kind of recovery where everyone wakes up and says "well thank God that's over." Instead, it will be one where someone driving to work, or home from soccer practice suddenly realizes, "hey... it's not as bad as it was." Then that person shares that thought with one or two others.

There are some signs, limited, but with some promise, that realization may be happening as soon as this calendar year.